SYDNEY / NEW YORK (Reuters) — Vitol SA <VITOLV.UL>
is buying Royal Dutch Shell's <RDSa.L> Australian downstream
businesses for about A$2.9 billion ($2.6 billion) in its biggest
acquisition, as the oil trader looks to grab a share of the
country's lucrative oil product market.

The purchase, which includes a refinery and 870 service stations
plus Shell's bulk fuels, bitumen and chemicals businesses, will pit
Swiss-based Vitol against rival Trafigura Beheer <TRAFG.UL>, which
became Australia's largest independent fuel retailer last year.

Australia has become one of Asia's biggest fuel importers as oil
majors have shut older refineries and turned away from the
relatively small market in favor of higher yielding opportunities
elsewhere.

Shell, attempting to win round investors after a major profit
warning early this year, said in January it was targeting $15
billion of disposals over the next two years as it tries to deliver
more attractive returns to shareholders.

"(Vitol) can provide the inputs, supply these activities, (run)
these downstream activities efficiently, and they can make a return
on them that is satisfactory for them but that is not sufficient for
a company like Shell," said Craig Pirrong, Professor of Finance at
University of Houston.

"These two companies have different return expectations and targets
they're willing to accept."

A Vitol spokeswoman confirmed that the Abu Dhabi Investment Council
sovereign fund was part of the group which bought the assets.

Dutch-owned Vitol entered the race for the Australian petrol
stations after Trafigura's Puma Energy arm bought two fuel
distributors.

Others eyeing the market include South Korean refiner S-Oil
<010950.KS>, which said last month it was in exclusive talks to buy
a stake in Australia's United Petroleum, a privately owned business
valued at about A$1 billion, including debt, that received a number
of approaches from international companies following Puma's takeover
of Ausfuel.

"Australia is a growing economy and we look forward to working with
the management team to strengthen and grow the business," Vitol
President and CEO Ian Taylor said in a statement.

Australia's refineries, owned by Shell, BP <BP.L>, ExxonMobil <XOM.N>
and Caltex <CTX.AX>, have mostly booked losses over the past several
years as tighter fuel quality standards and mega refineries in Asia
have made them uncompetitive.

Rather than spend money on upgrading their plants, the majors have
been looking to sell them or turn them into fuel import terminals.

That has created an opportunity for the giant oil traders looking to
expand their oil products market share and grow volumes in face of
competition from local trading firms in big markets like Indonesia
and Vietnam.

Taylor told reporters that Vitol intended to run the Geelong
refinery in Victoria state "as a successful profitable refinery".

Shell, which retains substantial gas interests in Australia as well
as a $7 billion stake in Woodside Petroleum <WPL.AX>, was making
tough portfolio choices to improve its overall competitiveness,
Chief Executive Ben van Beurden said in a statement.

It has already sold downstream assets including refineries in the
UK, Germany, France, Norway and the Czech Republic and downstream
businesses in Egypt, Spain, Greece, Finland and Sweden.

"The new (Shell) management is being ruthless in cutting out
anything that they think is extraneous to their core," said Al
Troner, President of Asia Pacific Energy Consulting in Houston,
Texas.

"Australia is a big, continental country, but in terms of its oil
demand, it's a mid-size Asia Pacific country. Shell has been doing
its calculations and basically they came to the conclusion 'should I
stay or should I go?'"

Most of Shell's refining and distribution staff will continue to
operate the Australian business and the Shell branding would remain
under its new owner, Shell said.

The sale includes a brand license arrangement and a distributor
arrangement for Shell Lubricants but not Shell's oil and gas
producing operations, the companies said.